The cost of production report of the
testing department differ from that of the
Blending Department (first department) in several
respects. Several additional calculations are made, for which space has been
provided on the report. The additional information deals with:

Cost received from the preceding
department.

An adjustment of the preceding
department's unit cost because of lost units.

Cost received from the preceding
department to be included in the cost of ending work in process inventory.

An analysis of the work in process (WIP)
indicates that units in process are but one third complete as to labor and
factory overhead. Unit costs, $0.91 for labor and $0.80 for factory
overhead, were calculated as follows:

Equivalent production of the testing
department is 41,000 units [40,000 + $1/3 × (3,000)], the labor unit cost is $0.91
($37,310 / 41,000), and the factory overhead unit cost $0.80 ($32,800 /
41,000). There is no materials unit cost, since no materials were added by
the department. The department unit cost is $1.71, the sum of the labor unit
cost of $0.91 and the factory overhead unit cost of $0.80.

The testing department is responsible for
the labor and factory overhead used as well as for the cost of units
received from the
Blending Department (first department). This latter cost is inserted as a
cost charged to the department under the title "cost from preceding
department" which is immediately above the section of the report dealing
with cost added by the department. The cost transferred in was $77,400,
previously shown in the cost report of the
Blending Department (first department) as cost
transferred out of that department by this journal entry:

The work in process account of the testing
department is charged with cost received from the preceding department and
with $70,110 of departmental labor and factory overhead (FOH), a total cost
of $147,510 to be accounted for by the department.

Units Lost in the Department Subsequent to the First:

The
Blending Department (first department) unit cost was $1.72
when 45,000 units were transferred to the Testing Department. However,
because 2,000 of these 45,000 units were lost during processing in the
Testing Department, the $1.72 unit cost figure no longer applies and must be
adjusted. The total cost of the units transferred remains at $77,400, but
43,000 units must now absorb this total cost, causing an increase of $0.08
in the cost per unit due to the loss of 2,000 units in the testing
department.

The lost units cost can be computed by one
of two methods.

Method No.1:

Determines a new unit cost work done in the
preceding department and subtracts the preceding departments old unit costs
figure from the adjusted unit cost figure. The difference between the tow
figures is the additional cost due to the lsot units. $1.80 new adjusted
unit cost for work done in the preceding department is obtained by dividing
the remaining good units, 43,000 (45,000 - 2,000), into the cost transferred
in, $77,400. The old unit cost figure of $1.72 is subtracted from the
revised unit cost to arrive at the adjustment of $0.08.

Method No. 2:

Determines the lost units share of total
cost and allocates this cost to the remaining good units. total cost
previously absorbed by the units lost is $3,440, which is the result of
multiplying the 2,000 lost units by their unit cost of $1.72. The $3,440
cost must now be absorbed by the remaining good units. The additional cost
to be picked up by each remaining good unit is $0.08 (3,440 / 43,000 units).

The lost unit cost adjustment must be
entered in the cost of production report. The$0.08 is entered on the
"Adjustment for lost units" line. The departmental unit cost of $1.71 does
not have to be adjusted for units lost. In the testing department, the cost
of any work done on lost units has automatically been absorbed in the
departmental unit cost by using the equivalent production figure of 41,000
instead of 43,000. The $1.72 unadjusted units cost for work done in the
preceding department, the $1.71 departmental unit cost, and the $0.08
adjustment for lost units are totaled in order to obtain the $3.51
cumulative unit cost for work done up to the end of operations in the
testing department.

Timing of Lost Units:

Lost units may occur at the beginning,
during, or at the end of a manufacturing process. For purposes of
practicality and simplicity, it is ordinarily assumed that units lost at the
beginning or during the process were never put in process. The cost of units
lost is spread over the units completed and units still in process.

When units are lost or are identified as
lost at the end of a process, the cost of the lost units is charged to
completed units only. No part of the loss is charged to units still in
process. Assume that the 2,000 units lost by the testing department were the
result of spoilage found at final inspection by the quality control
department; their cost would be charged only the 40,000 finished units, as
illustrated below:

The Clonex Corporation
Testing Department (2nd Dept.)
Cost of Production Report
For the Month of January, 19

A comparison of the differences between the
two cost of production reports for the testing departments as to amounts for
costs of units transferred and work in process inventory is shown below the
production report. Not the offsetting increases and decreases.

In this illustration, the assumption has
been made that the lost units, identified at the end of the process, were
complete as to all costs. In sum companies, members of the quality control
or inspection departments make production checks prior to the end of the
process. Such a procedure uncovers lost units that are not complete when the
loss is incurred or the spoilage discovered and yet the loss may pertain
only to units completed and not to units still in process. In such a case
the lost units should be adjusted for their equivalent stage of completion.
For example, 2,000 units lost at the 90% stage of conversion would appear as
1,800 equivalent units with regard to labor and factory overhead costs.

Normal Vs Abnormal Loss of units:

Units are lost through evaporation,
shrinkage, substandard yields, spoiled work, poor work man ship, or
inefficient equipment. In many instances the nature of operations makes
certain losses normal or unavoidable, because they are considered with in
normal tolerance limits for human and machine errors. The cost of these
normally lost units does not appear as a separate item of cost but is spread
over the remaining good units.

A different situation is created by
abnormal or avoidable spoilage or losses that are not expected to arise
under normal, efficient operating conditions. The cost of such abnormal
spoilage or losses is charged either to factory overhead as shown below,
thereby appearing as an additional unfavorable able factory overhead
variance, or directly to a current period expense account and reported as a
separate item in the cost of goods sold statement.

If the lost units were only partially
complete, equivalent production calculations should consider their stage of
completion when lost or spoiled, and the costing of the abnormal loss should
be weighted accordingly. If one part of the loss is normal and another
abnormal, each portion must be treated in accordance with the above
discussion. The critical factor in distinguishing between normal and
abnormal spoilage or loss is the degree of controllability. Normal or
unavoidable spoilage or loss is produced by the process under efficient
operating conditions, referred to as uncontrollable. Abnormal or avoidable
spoilage or loss is considered unnecessary, because the conditions resulting
in the loss are controllable. For this reason, within the limits set by the
state of the art of production, the difference is a short-run condition; in
the long run, management should adjust and control all factors of production
and eliminate all abnormal conditions.

The cost of production report at the
beginning of this page shows a total cost of $147,510 to be accounted for by
the Testing department. The department completed and transferred 40,000
units to the
Terminal Department (third or final department) at a cost of $140,000
(40,000 × $3.51).
The remaining cost is assigned to the work in process inventory. This
balance is broken down by the various costs in process. When computing the
cost of the ending work in process inventory of any department subsequent to
the first, costs received from the preceding departments must be included.

The 3,000 units still in process, completed
by the
Blending Department (first department) at a unit cost of $1.72, were later adjusted by
$0.08 (to $1.80) because of the loss of some of the units transferred.
Therefore, the
Blending Department's (first department) cost of the 3,000 units still in
process is $5,400 figure is not broken down further , since such information
is not pertinent to the Testing Department's operations. However, the amount
is listed separately in the cost of production report, because it is part of
the Testing Department's ending work in process inventory.

Materials (if any), labor, and factory
overhead (FOH) added by a department are costed separately in order to arrive
at total work in process (WIP). In the testing department, no materials
were added to the units received; thus, the ending inventory shows no
materials in the process. However, labor and factory overhead costs were
incurred. The work in process analysis stated that labor and factory
overhead used on the units in process were sufficient to complete 1,000
units. The cost of labor in process is $910 (1,000 ×
$0.91) and factory overhead is process is $800 (1,000 ×
$0.80). The total cost of the 3,000 units in process is $7,110 ($5,400 +
$910 + $800). This cost, added to that transferred to the
Terminal Department (third or final department),
$140,400, accounts for the total cost of $147,510 charged to the Testing
Department.

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